AFP GUIDE TO
®
Mobilizing Global Cash
Global Liquidity Guide Series
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AFP GUIDE: Mobilizing Global Cash
AFP GUIDE TO
®
Mobilizing Global Cash
Global Liquidity Guide Series
Welcome to AFP’s Liquidity Management Guide to
Mobilizing Global Cash.
In today’s volatile and dynamic market environment, global treasury
operations are consistently being challenged with optimizing liquidity.
Prudent departments have instituted fundamental cash visibility and
forecasting structures to assist in addressing these challenges. For leading,
multinational treasuries, deploying optimized cash mobilization structures
through notional or physical cash pools proves to be the key to unlock
liquidity and mitigate risk.
With new risk areas continuing to surface across the enterprise, treasurers
must carefully monitor and mitigate the risk landmines of today’s financial
environment. When mobilizing cash, danger areas such as liquidity risk,
credit risk, country risk, continent risk, currency risk, counterparty risk, tax
“This guide provides key
Contents
Introduction1
Why Mobilize Global Cash?
2
Techniques6
Issues affecting pooling
10
Structures13
Conclusion – Identifying Best Practice
21
Appendix – Cash Pooling Availability
Internationally23
insights into common
treasury objectives on
mobilizing global cash and
the factors that are leading
so many organizations to
examine how they optimize
cash and manage risks.”
Jason Torgler, Reval
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the Association for Financial Professionals. © 9/12
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AFP GUIDE: Mobilizing Global Cash
risk and operational and compliance risk can rear their ugly heads. Without
transparency and visibility into those cash structures you can leave yourself
exposed to these numerous risks.
Optimized cash pools and structures allow treasurers the transparency into
cash movements, positions and currencies thus providing visibility into your
risk positions and allowing you properly to assess your risk tolerance.
This guide provides key insights into common treasury objectives on
mobilizing global cash and the factors that are leading so many organizations
to examine how they optimize cash and manage risks, and the transformational
changes they need to undertake. This guide also outlines structural diagrams,
tax rules, banking considerations, risk awareness and other proven techniques
around the ‘how-to’ of sweeping and notional pooling.
There is no perfect structure. Each organization has unique elements that
require mixtures of models and shifting of structures over time. The benefits
are well worth the effort. Organizations that mobilize and optimize global
cash benefit from:
■■ reduced borrowing costs;
■■ maximized opportunity for investment;
■■ reduced transaction and administration costs;
■■ improved control of group cash;
■■ optimized foreign exchange hedging and risk management; and
■■ a better understanding of the opportunities for the strategic deployment of
cash via, for example, acquisitions, stock buyback, business reinvestment
and business divestiture.
Banks and technology partners serve as strong allies in your analysis and
deployment. Lean on them for insight and assistance – the upside is tremendous.
>
Jason Torgler, Vice President, Corporate Strategy @ Reval
DISCLAIMER: The material contained in this publication is not intended to be advice on any particular matter. No subscriber
or other reader should act on the basis of any matter contained in this publication without considering appropriate professional
advice. The publishers, author, third-party information providers, editors, and sponsor expressly disclaim all and any liability to
any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or
omitted to be done by any such person in reliance upon the contents of this publication.
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AFP GUIDE: Mobilizing Global Cash
Introduction
Treasury practitioners are under tremendous pressure
to manage cash efficiently, while at the same time
minimizing any risk to their organization. For those
in international businesses, the challenges involved in
managing cash are multiplied by the complex nature
of international regulation, and varying local banking
practices around the world.
The core challenge for all treasury practitioners is to
ensure visibility of their group’s positions globally.
Having clear knowledge of each operating entity’s
cash position can help to ensure it is funded as
economically as possible, and that any surplus cash is
invested safely. Additionally, complete and accurate
visibility into cash positions also helps the group
treasury to identify how the group is exposed to risk,
and to develop strategies to manage those exposures.
For an organization which has few transactions
outside its home market, it is possible to manage
all payments and collections without opening bank
accounts in other countries. In such a case the cost of
operating and managing bank accounts abroad may
not be justified, even though managing cross-border
payments can be expensive and time-consuming.
However, once an organization has an appreciable
number of cross-border transactions, or has a physical
presence in different markets, it becomes more
cost‑effective to open bank accounts outside the
home market to manage these transactions. Where
such bank accounts are opened by the local operating
entity, the organization’s central treasury may find it
difficult to obtain accurate, timely information on
cash balances and foreign exchange positions in each
foreign location.
The greater the number of a group’s bank accounts,
and the number of currencies in which they are
denominated, the harder it is for the group treasury
to keep track of the balances on those accounts.
Mobilizing cash on a global basis via the use of
notional and physical cash pools can help the group
treasury operate more efficiently. These structures
allow balances on the various bank accounts to be
aggregated, typically by currency, so that the group
can more easily identify those accounts with cash
surpluses, and those which require funding. Where
cash is pooled on a cross-border basis, intercompany
transactions are part of the structure, allowing entities
with a cash requirement to be funded automatically.
At the same time, such structures help the group
treasury to understand its foreign exchange positions
and to ensure that they are hedged appropriately.
This paper looks at the reasons for mobilizing global
cash, identifies the main techniques used to do
so, and outlines the main barriers to using these
techniques. The paper then provides a guide to the
key stages in developing an appropriate global cash
management structure for meeting an organization’s
objectives. It concludes with an appendix outlining
the availability of physical and notional pooling in
key markets around the world.
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AFP GUIDE: Mobilizing Global Cash
Why Mobilize Global Cash?
Any organization with operations outside its home
market will need to decide how to manage those
operations. In the past, there was little choice,
especially with respect to cash management. Today,
however, changes in banking practice, improvements
in communications and the effect of steady regulatory
change mean that organizations now have many
different options when making that decision. At
the same time, treasury practitioners are under
greater pressure than ever to reduce operating costs,
while simultaneously taking steps to manage risk as
effectively as possible.
In this context, treasury practitioners are expected
to use cash as efficiently as possible within their
organizations. For organizations operating in a
number of different countries, this requirement can
be translated to mean using cash as efficiently as
possible, on a global basis.
Although global cash management is now possible,
there are still some major challenges for treasury
practitioners seeking an efficient solution. Decisions
may vary according to the underlying purpose
of the group’s cash management structure. It is
important that the treasury practitioner has a
clear understanding of the core objectives before
establishing a new global cash management structure
(or when reviewing an existing one).
Companies seek to mobilize global cash for a variety
of reasons, including:
■■ improving
■■ reducing
the efficient use of cash;
borrowing costs;
■■ maximizing
■■ improving
■■ better
opportunity for investment;
control of group cash;
foreign exchange risk.
Improve the efficient use of cash
One of the most significant potential benefits from a
global approach to the use of cash is the opportunity
to reduce the costs of processing. This can be achieved
even if the organization decides against implementing
a wider cash pooling structure.
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The seemingly simple act of making and receiving
payments across an organization can be made
extremely efficient. This can be done by working to
reduce operational cost. This arises in two main forms:
■■ Transaction
costs. There are costs associated with
any transactional activity, whether making or
receiving payments. In any organization with
operations abroad, there is necessarily a greater
volume of cross-border payments. Cross-border
payments tend to be much more expensive to make
than equivalent in-country payments, even if no
foreign exchange transaction is required. As well as
the transaction cost charged by the bank, there will
be additional costs associated with the transaction.
Cross-border payments often take much longer
to process than in-country equivalents, and this is
reflected in the different value dating rules applied
by banks in these circumstances.
For example, cross-border check payments can take
many days to clear. During this time, banks are
usually not prepared to give value, or even to allow
the funds to be used, until final settlement has been
achieved.
■■ Administration
costs. As well as the processing
costs, there are also costs associated with the
administration of bank accounts and payments.
In a global organization, there can be significant
duplication of both personnel and technology. The
need to have appropriate segregation of duties will
have implications for staffing levels in each entity
with control of bank accounts. In addition, each
such organization will have a treasury platform
to maintain control of these bank accounts
(even though a platform may simply be a set of
spreadsheets, with all the risk factors they entail).
>
Adopting a global approach to the mobilization of
cash can help to reduce operational cost in a number
of ways.
■■ Transaction
costs. Transaction costs can be reduced
by ensuring that as many payments as possible are
routed as cheaper, in-country payments. Instead of
sending a series of expensive cross-border payments,
technology allows companies to send a single
cross-border payment file to a bank in a particular
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AFP GUIDE: Mobilizing Global Cash
country. The file contains instructions to the
bank to make a series of less-expensive in-country
payments to recipients in that country.
■■ Administration
costs. The twin costs of personnel
and technology can be reduced via the use of
treasury workstations and cash management
systems. These systems increasingly allow treasurers
to establish payment authorization protocols which
allow personnel in different locations to approve
payments automatically. These systems also enable
treasury departments to view many different
bank accounts in different locations on the same
platform. For a global organization, the platform
will need to be sophisticated enough to manage
cash flows and bank account positions in a number
of different countries and different currencies. The
challenge for the treasury professional is to reduce
the complexity of this task.
■■ Bank
account management costs. In a company
with a global view of cash, one of the key objectives
is to exercise a degree of control over the opening
and maintenance of bank accounts. Once bank
accounts are open, there can be significant costs
associated with identifying every bank account held
by the group. This is a core task, if the treasury
professional is to achieve visibility of cash. In this
context, it is appropriate to review every bank
account and evaluate whether or not it should
remain open. One reason for this is that, although
approaches differ between banks, they generally levy
an annual fee for maintaining bank accounts, on
top of the transaction fees. Reducing the number
of bank accounts may also allow the company to
negotiate better transaction fee levels (as volumes
through each account may well be higher).
Even where local entities have the authority to open
and operate bank accounts, the central treasury
should try to develop a clear policy governing the
use of bank accounts (the circumstances in which
accounts can be opened, the level of authorization
required), even if, in a decentralized organization,
following that policy is not compulsory.
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Reduce borrowing costs
In an ideal scenario, an organization will avoid any
situation where one group entity is borrowing from
external lenders when another group entity has
surplus cash to invest. By putting in place a cash
mobilization structure, any internally generated
surplus cash can be made available to support group
entities with funding requirements.
Although the organization will have to respect
transfer pricing rules in relevant jurisdictions, and
offer arm’s-length funding, any internal cash recycled
through the business in this way will be cheaper
than arranging external funding from banks or other
sources. This is because the internal funding will not
attract the risk premium external finance providers
would need to charge. These funding streams will be
relatively reliable (assuming accurate internal group
forecasts), as they will not be subject to covenant
restrictions and other factors which can lead to banks
withdrawing funding.
Even if the group as a whole is a net debtor, with
little or no surplus funds available to be recycled
through the business, it should be possible to use
a cash structure to reduce borrowing costs. This is
because borrowing requirements can be aggregated
at the group center. In most organizations, as long as
the group has a better credit rating than the group
entities, the central treasury will have access to funding
at better rates. This applies for two reasons. Firstly, the
group treasury will be able to leverage its credit rating
to obtain better financing rates from its banks than
are likely to be available to individual group entities
in their different locations. Secondly, by aggregating
the funding requirement, non-bank financing
techniques, such as a commercial paper program, may
become viable. This will have the additional benefit of
diversifying the group’s sources of funding. (However,
by centralizing funding, the group may lose access
to some of the local funding sources, which would
themselves have been a source of diversification.)
Maximize opportunity for investment
Once any available cash has been recycled within
the business, the remaining cash is available for
external investment. If a group has previously
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AFP GUIDE: Mobilizing Global Cash
been simultaneously investing and borrowing, any
return earned on net invested funds will be higher
than before. This is because any investment returns
would have been reduced by the higher cost of the
simultaneous borrowing.
Consolidating balances (even when precautionary
balances are left in-country) may give the central
treasury team access to greater levels of funds to
invest. Having a greater pool of funds to invest may
justify the employment of a specialist investment
manager (either within the treasury team on a
full-time or part-time basis, or in an outsourced
arrangement). A larger pool of funds may give the
group access to a wider pool of potential investment
instruments, helping to diversify risk. Moreover,
when combined with an effective forecasting system
(see the previous title in this series), a central treasury
may have the opportunity to invest some of the
surplus cash for longer periods. This may offer an
enhanced return, and will reduce the operational
risk associated with the process of investment
management, although the group will have to accept
a loss of liquidity in return.
However, by creating a larger pool of funds, the group
may thereby expose itself to a greater counterparty
risk, requiring a tighter focus on investment
management. While a loss of principal when funds
are invested at a local level would have an impact on
the local entity, a loss of principal when investing at
group level would affect the group as a whole. (The
next title in this Liquidity Management Series will
look at techniques to manage this investment risk.)
Improve control of group cash
One of the core benefits of a cash mobilization
structure is that it can give group treasury a greater
visibility, and therefore control, over group cash.
By pooling cash to one or more header accounts
(either physically or notionally), the group treasury
only has to monitor those accounts, rather than the
multitude of group accounts that an organization
might hold. Even if circumstances dictate that
pooling to a single global account is neither possible,
practical, nor desirable, a central treasury can still gain
greater insight from a series of pooled accounts. The
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implementation of a group structure, even if it only
ever applies at country level, will allow bank accounts
to be linked and balances consolidated between those
accounts. At the same time, any action to reduce the
number of bank accounts held by the group will also
act to improve visibility and control over group cash.
Better foreign exchange risk management
A global approach to cash mobilization also offers the
opportunity to manage foreign exchange transactions
and risk more effectively. Without a global approach,
each entity will be responsible for managing its own
foreign exchange positions. Just as a group may find it
is simultaneously borrowing and investing, it may also
find it is simultaneously long and short in the same
currencies. Implementing a global structure will allow
the group to reduce the amount of external foreign
exchange transactions in such circumstances. This
will reduce the costs associated with the transactions.
There will also be a reduction in transaction risk, as
fewer transactions are necessary.
The central treasury may also be able to identify more
natural intra-group hedge relationships as a result of
tighter control over cash, reducing the need to take
external hedge positions.
>
There are a number of different approaches to
managing foreign exchange risk in a global cash
mobilization structure. At one extreme, there is
the required use of an in-house bank. In such
circumstances, all participating group entities hold
bank accounts only with the in-house bank, in
their own operating currencies. The in-house bank
then manages any foreign exchange transactions
and positions on behalf of the group entities. It will
require significant investment in terms of time and
resources (notably technology) to implement such
a system. However, once established, it should aid
efficiency by avoiding the need for each participating
group entity to manage its own foreign exchange.
Other organizations require group entities to
consolidate cash in group operating currencies
(typically the USD or the EUR) on a cross-border
basis. Group entities are able to maintain their
own accounts in their own local currency. These
accounts can still be pooled on an in-country
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AFP GUIDE: Mobilizing Global Cash
basis to provide group treasury with visibility over
positions in those currencies.
It is also possible to implement structures to manage
any internal foreign exchange positions. For example,
the use of an intra-group netting system for any
intercompany payments can help to reduce the need
for foreign exchange transactions.
Adopting a global approach to cash mobilization
can also help the group treasury implement and get
group entity support for a clear policy regarding the
use of local and foreign currency bank accounts. As
discussed, there can be significant costs associated
with identifying, managing, and controlling activity
on an organization’s bank accounts across the world.
Central treasury may be able to restrict the ability of
local group entities to open foreign currency bank
accounts for particular purposes, or even to prohibit
foreign currency accounts altogether.
Conclusion
The key for any treasury practitioner is to identify
the required objectives of cash mobilization, before
implementing or reviewing a structure. Any structure
should be assessed against these objectives.
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AFP GUIDE: Mobilizing Global Cash
Techniques
DIAGRAM OF PHYSICAL CASH POOL
For any organization seeking to mobilize cash, there
are two fundamental techniques available: physical
pooling (also called sweeping, or cash concentration)
and notional pooling. These fundamental techniques
are varied in some locations to allow banks to offer
pooling services in ways which are compliant with
local regulations.
Physical pooling
Physical pooling involves the physical movement of
cash from one account to a header or master account.
All cash balances on participating bank accounts are
physically transferred to the header account. This
header account is usually held in the name of the
group treasury or headquarters, or in the name of a
separate treasury company.
There are a number of different ways to operate a
physical pooling structure:
■■ Automated
sweep. At a specified time towards the
end of the day, balances are automatically swept
from participating accounts to the header account.
The size of the transferred balance can be varied.
The simplest form of sweep is a zero-balancing
pool. This has the effect of reducing all balances
on participating bank accounts to zero (where a
bank account is in deficit, the transfer takes the
form of a payment from the center). Alternatively,
treasurers can decide to set target balances for each
participating bank account, for precautionary
reasons or because of observed inaccuracies in
the forecasting systems. This is known as target
balancing, with the effect that any transfers result
in the bank accounts having the target balance
(rather than zero).
participation in an in-house bank.
Requiring group entities to participate in an
in-house bank results in a de facto physical
cash pool. Cash is concentrated at the in-house
bank as group entities are required to hold bank
accounts with the in-house bank, rather than with
Cash pool
master
account
Sub A
bank
account
Sub B
bank
account
Sub C
bank
account
This diagram shows a simple physical cash pool
relationship, in which three group subsidiaries
participate. The master, or header, account is
typically held in the name of the group treasury.
Transfers between the subsidiary accounts and
the master account will either take place as
internal bank book transfers (if the accounts
are held with the same bank) or as external
electronic funds transfers (this can be a domestic
or cross-border payment). Group subsidiaries
participating in a physical cash pool do not have
to hold bank accounts with the bank operating
the master account.
>
If the group subsidiary accounts are in deficit (or
below a target balance), they will be funded by
the master account. If the accounts have surplus
cash (either a positive balance or above a target or
threshold balance), this will be transferred to the
master account.
If a physical cash pool incorporates bank accounts
in more than one country, it is common for cash to
be pooled to local master accounts in each country
first, before being pooled to the center.
■■ Compulsory
any external banks. Depending on the way the
in-house bank is structured, group entities might
hold mirror accounts with the in-house bank for
accounting and other reasons.
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AFP GUIDE: Mobilizing Global Cash
DIAGRAM OF IN-HOUSE BANK
USD
A
Sub A
EUR
A
GBP
A
USD
B
Sub B
IN-HOUSE
BANK
EUR
B
External
USD
account
Suppliers
USD
External
EUR
account
Suppliers
EUR
External
GBP
account
Suppliers
GBP
GBP
B
This diagram shows a core in-house bank structure.
Two subsidiaries are shown participating in the
in-house bank. Both have suppliers who are paid in
USD, EUR and GBP. They would ordinarily choose
to hold bank accounts denominated in the three
currencies. With an in-house bank, the participating
subsidiaries do not hold external bank accounts.
Instead they hold one or more bank accounts
with the group in-house bank. In this example,
the in-house bank is structured such that each
subsidiary holds mirror accounts in each of the
three currencies. (In some cases, group subsidiaries
only hold one account with the in-house bank,
denominated in their operating currency.) The
■■ Discretionary
participation on periodic basis.
In some circumstances, it is not appropriate to
operate an automatic sweep. If balances are low, but
in credit, it may not be cost-effective to concentrate
cash to the center on a regular basis. In some
locations, exchange controls or other regulations
make automatic sweeping impossible. In addition,
some organizations prefer the decision of whether
to remit funds to the header account to remain
with the local entities. In all of these situations,
operationally it may be more efficient to implement
a discretionary cash pool, where balances are pooled
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in-house bank then holds external bank accounts in
as many currencies as necessary, in this case USD,
EUR and GBP. These accounts are used to pay the
group subsidiaries’ suppliers and to make and receive
other external payments.
>
This concept can be expanded to include many
different group subsidiaries and currencies, although
the platform used to operate the in-house bank
needs to be robust enough to cope with the
volume of activity, as well as being sophisticated
enough to meet the different legal, accounting and
regulatory requirements which apply in each relevant
jurisdiction.
when cash surpluses reach a certain level, or on a
weekly, monthly or quarterly basis, at the discretion
of an authorized individual.
The most common variation of physical cash pooling
is balance netting, also known as single legal account
pooling. In this structure, the group holds a single
external bank account (the single legal account), often
in the name of the group treasury or similar entity. All
transactions on behalf of the participating entities are
processed through this single account. Participating
entities hold mirror accounts with the group treasury, in
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BALANCE NETTING
A small Norwegian group with subsidiaries in
Denmark, Norway and Sweden is able to take
advantage of its bank’s balance netting service.
It operates a single legal account for the group
denominated in Norwegian krone. Each subsidiary
participates in the single legal account, such that
there are three main sub-accounts in the system:
one denominated in Norwegian krone (NOK),
one denominated in Swedish krona (SEK) and one
denominated in Danish krone (DKK)
Each subsidiary can use the sub-account in the same
way as a traditional bank account. Subsidiaries make
and receive payments and view account information
in their own operating currencies. The group
headquarters can also view the positions on all three
sub-accounts. The bank also notionally translates
the Danish and Swedish balances into NOK in
real time, giving the group treasurer a single group
position across the single legal account.
which all their transactions are recorded. This form of
pooling is popular in the Nordic and Baltic regions, and
is offered on a cross-border and multicurrency basis.
has been developed in which a bank acts as the
trusted partner to both group entities. The bank sits
between the participating entities, so that the two
entities do not have a direct relationship and yet one
entity can effectively lend funds to the other.
In some jurisdictions (notably China), intercompany
loans are not permitted. An entrusted loan structure
DIAGRAM OF NOTIONAL CASH POOL
This diagram shows a basic notional cash pool
structure. Three group subsidiaries participate in
the notional cash pool and hold bank accounts
with the bank operating the notional pool. The
notional cash pool incorporates three memo
accounts in the name of each participating
subsidiary and a master account. The memo
accounts simply reflect the balances in each
subsidiary’s bank account. There is no physical
movement of funds either between the subsidiary
account and the respective memo account or
between the memo account and the master
account. The bank charges or apportions interest
to the cash pool, based on the aggregated balance
of the master account.
For example, if Sub X had a positive balance of
EUR 450, Sub Y had a positive balance of EUR 220
and Sub Z had a negative balance of EUR 370, the
notional cash pool would have a net positive balance
of EUR 300 (450 + 220 – 370). The bank would
apportion credit interest on the EUR 370. Subs X and
Y would receive an interest payment; Sub Z would be
charged interest on the overdraft.
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NOTIONAL CASH POOL
Cash pool
master
account
Memo
account
Sub X
Memo
account
Sub Y
Memo
account
Sub Z
Sub X
bank
account
Sub Y
bank
account
Sub Z
bank
account
This structure is most commonly found on an
in-country, single currency basis, although crossborder and cross‑currency notional cash pools are
available in some jurisdictions.
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AFP GUIDE: Mobilizing Global Cash
Notional pooling
Unlike a physical cash pool, a notional cash pool
does not involve any physical movement of cash
balances. Instead, a bank notionally aggregates
balances participating in the pool, and allocates debit
or credit interest to each participating bank account
as appropriate. Unlike a physical cash pool, all
participating entities must hold bank accounts with
the same bank.
Because there is no physical movement of cash, no
decisions about the timing or level of participation
need to be made. Instead, all participating bank
accounts will be notionally pooled on their whole
balance (whether positive or negative), at the
appropriate time.
A notional cash pool means that participating entities
retain control of their bank accounts. In addition,
there are no fees associated with movement of cash
from one bank account to another.
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AFP GUIDE: Mobilizing Global Cash
Issues affecting pooling
The availability of different forms of cash pooling,
both in-country and on a cross-border basis, depends
on the local interpretation of a number of key issues.
These issues can affect both the legality and financial
viability of cash pooling solutions. As a result, it is
vital that appropriate legal advice is taken before a
cash pooling structure is implemented.
Bank capital adequacy rules
Bank capital adequacy rules vary in their application
around the world. They are most likely to affect the
availability of notional pooling as, in some
jurisdictions, banks are not allowed to offset credit
and debit balances for capital adequacy reasons.
While some banks are still prepared to offer notional
solutions in these countries, they are unlikely to be
cost-effective for the client. This is because the bank
will still charge a larger margin on any debit balances
than it offers on credit balances, and the benefit of
pooling is lost without any physical movement of cash.
Cross-guarantees
A requirement for cross-guarantees can also add
cost to a pooling structure. Where banks are
permitted to offset credit and debit balances, they
may still require cross-guarantees to be in place
between all participating entities. (This may be a
bank requirement or a regulatory requirement.)
This applies most often when bank accounts held
by different legal entities participate in the same
structure. A cross-guarantee is an undertaking that
any participating entity will make good any loss of
funds from another participating entity. The crossguarantee gives the bank assurance that it can reclaim
funds from a group in the event that a participating
entity becomes insolvent.
Cross-guarantees affect the efficiency of pooling
structures in two ways. Firstly, they can be costly to
agree and implement, especially if a large number of
entities from a large number of jurisdictions are part
of the same structure. Legal fees may be significant.
The bank (and its auditor and regulator) will also
need to accept the validity of all cross-guarantees
to set up the structure. It can be difficult and timeconsuming to obtain approval for cross-guarantees
from tax authorities.
Secondly, the existence of a cross-guarantee can have
wider implications for an entity’s ability to raise
funds from external sources. This is because potential
lenders may consider the guarantee to be an existing
charge on the entity, limiting the potential security
for future finance.
In these circumstances, treasurers should think
carefully about the potential costs and benefits before
pursuing a pooling structure. Drafting and obtaining
approval for any cross-guarantees can be the most
difficult element of any pooling structure. For these
reasons, many international organizations leave at
least some entities outside of their pooling structure.
Exchange controls
The existence of exchange controls can affect both
in-country and cross-border pooling structures.
Exchange controls can prevent cross-border pooling
structures from including bank accounts that are
held in jurisdictions which apply certain controls.
Even when participation is strictly possible, the
level of documentation required to support a crossborder transaction can make pooling too expensive
to implement. Some countries require group entities
to repatriate profits within a certain period of time,
which effectively prevents participation in a cash pool.
>
Exchange controls can also affect in-country pooling
in a number of ways:
■■ Restrictions
on bank accounts. There may be
restrictions on the nature of bank accounts that
different entities can open, and the ways in which
entities can use them.
■■ Restrictions
on participation in cash pooling
structures. A number of jurisdictions prevent
resident and non-resident bank accounts from
participating in the same cash pooling structure.
■■ Restrictions
on cross-currency pooling. Regulations
may make it difficult or impossible to pool balances
in-country if they are denominated in different
currencies.
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AFP GUIDE: Mobilizing Global Cash
Finally, in some locations, the lack of availability of
foreign currency can prevent cross-currency pooling,
even in the absence of any local regulations.
Central bank reporting requirements
Many central banks require companies (or their
banks) to submit details of cross-border transactions,
including transfers between resident and non-resident
bank accounts. Where such requirements apply, they
can impose an operational burden on the company
(especially if supporting documentation is required),
which realistically prevents physical pooling.
Tax rules
Local tax rules can have a significant impact on
the viability of particular structures and on the
participation of individual group entities. The
most common rules which affect cash pooling are
explained below.
Withholding tax
Withholding tax can reduce the efficiency of a
pooling structure, as the interest is usually withheld
at source. The application of any withholding tax will
vary according to the residency of the participating
entities, the nature of those entities (branches
often have a different tax treatment to permanent
establishments), and the residency of the bank
offering the pooling service.
In some cases, a company is able to recover any
withheld interest, often under the terms of a
double taxation treaty. However, this will place an
administrative burden on the company, often in the
form of additional record-keeping requirements to
ensure funds can be recovered: some banks may be
able to support the company in this regard, although
not all banks can. In addition, the company will lose
the benefit of the withheld sum until it is recovered.
In a cross-border structure, any pooling structure can
give rise to dividend payments (rather than interest
payments), depending on the assessment of the local
tax authorities.
It is also important to recognize that not all payments
in a pooling structure are liable for withholding tax,
even if there is a general requirement. Examples of
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exemptions in different jurisdictions include interest
payments between entities with the same beneficial
ownership, and interest payments on loans if the
length of the loan is less than one year.
Thin capitalization
The issue of thin capitalization arises if the tax
authorities consider a participating entity to be
undercapitalized as a result of debt funding being
provided by other group entities. To avoid thin
capitalization questions, pooling structures usually
must be set up with interest rates set according
to arm’s-length rules, typically with interest rates
tied to an index, plus or minus a spread (thus
guaranteeing interest income for entities with
surplus balances). Arm’s-length rules should still
allow group entities to benefit from reduced
borrowing costs (or greater investment returns), as
the central treasury does not have to apply the risk
premiums charged by banks. Failure to apply arm’slength rules may result in the pooling transactions
being treated as a dividend payment by the tax
authorities, and therefore taxed as income.
Cross-border structures are often subject to greater
scrutiny by tax authorities, to protect against tax
evasion. Tax authorities are particularly sensitive to
suggestions that a cash pooling structure artificially
favors entities in high tax jurisdictions by moving tax
liabilities to low tax jurisdictions. Tax authorities will
often assess this by the use of relative debt-to-equity
ratios, where a thinly capitalized entity in a high tax
jurisdiction may be seen as trying to evade tax.
>
In addition, tax authorities will be looking to identify
any more permanent elements in a cash management
structure. If one participant is permanently cash-rich,
and another permanently being funded from the
pool, a tax authority may consider this to be a longterm intercompany loan, rather than a short-term
arrangement, and this may affect its assessment under
thin capitalization rules. This may also alter treatment
under withholding tax as well.
Transfer pricing
Transfer pricing arrangements will also be scrutinized
by tax authorities when assessing global cash
management structures as part of their role of
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AFP GUIDE: Mobilizing Global Cash
protecting their own tax bases. Much of the scrutiny
can be avoided by the use of arm’s-length pricing in
any pooling structure. However, tax authorities will
also look at the other aspects of any cross-border
structure. They will want to ensure that the entity
operating the header account is suitably rewarded for
managing the structure. If any cross-guarantees are
in place to meet capital adequacy requirements, tax
authorities will also want to make sure their cost is
adequately reflected in the structure.
It is important to recognize that cross-border cash
pools incorporating foreign exchange transactions
should also be assessed against the above criteria.
The arm’s-length principle should always be followed
in internal foreign exchange transactions, and a
benchmark market rate should be documented in
advance. These can be recorded from commonly
available market information systems, or taken when
external transactions are made. Again, tax authorities
will be looking to ensure that transfer pricing rules are
not breached. Bear in mind that it may be difficult to
identify an appropriate market rate for less commonly
traded currency pairs, if the structure incorporates
accounts denominated in such currencies. (These
are rare, both because the currencies themselves are
rare, and because it is difficult to establish structures
incorporating them.)
Stamp duty
Some countries apply a stamp duty on intercompany
loans. This will also add cost and complexity to any
cash pooling structure.
Importance of documentation
Because of the complexities involved in any pooling
structure, especially one operating on a cross-border
basis, it is vitally important that all decisions when
setting up a structure are fully documented. In
particular, the applicable interest rate on both credit
and debit balances must be fully documented to avoid,
as far as possible, action from tax authorities. These
documented rates must be applied consistently and
recorded carefully in an appropriate record-keeping
platform. Both treasury workstations and treasury
management systems have the functionality to manage
record-keeping. This may also be possible in some
ERP systems, and in bank-provided cash management
systems. If possible, it is worthwhile obtaining
approval from tax authorities before a pooling
structure is implemented. Auditors should also be
asked for approval of the record-keeping process.
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AFP GUIDE: Mobilizing Global Cash
Structures
The challenge for the treasury practitioner is to select
an appropriate mix of these techniques to create a
global cash mobilization structure.
When designing a structure, there are a number of
key issues which need to be considered, including:
■■ which
currencies to pool;
■■ how
to incorporate different national banking
practices;
■■ how
to comply with different regulatory practices;
■■ where
to locate the header account(s);
■■ how
many banks to use;
■■ how
the structure affects the group’s risk profile;
■■ how
to future-proof any new structure.
and
Which currencies should be pooled?
The treasury practitioner should start by determining
which currency or currencies should be pooled. If the
company decides to pool more than one currency, it
may be possible to do so within a multicurrency cash
pool, rather than having a set of individual singlecurrency cash pools. There are no set rules for making
this decision, other than that it should be reached on
a cost-benefit analysis basis.
As an illustration, the following are all techniques
followed by some global organizations:
■■ Cash
pool in main operating currency. Many
companies choose to maintain a global cash pool in
the company’s main operating currency, which may
also be the currency in which its main borrowings
are denominated. This can be supported by a series
of in-country pools in the respective local currency
accounts around the world.
■■ Regional
cash pools in important currencies. It may
also be appropriate to pool currencies on a regional
basis. For example, a group with three geographic
regions (Americas, Asia and Europe, Middle East
and Africa) may decide to pool USD in all three
regions, while also having an EUR-denominated
pool in EMEA. As before, this structure can be
supported by a series of in-country pools.
■■ Pool
all currencies, where possible. As treasury
management software has become more
sophisticated, group in-house banks have become
more popular. These can allow a group to pool all
currencies by only permitting group participants
to hold bank accounts with the in-house bank,
denominated in their operating currency. This
is a de facto multicurrency cash pool where all
foreign exchange transactions are managed by the
in-house bank.
■■ Operate
a regional multicurrency cash pool.
In some locations, notably the Nordic countries,
regional banks offer cross-currency, cross-border
currency pooling in all the regional currencies
(SEK, NOK, DKK and EUR). In the case of
Nordic cash pools, they usually operate using a
balance netting technique.
■■ Overlay
solution. In many cases, companies need to
work with more than one bank. This applies when
the group entities need access to local banks’ branch
networks (and retain the authority to select their
own local banks), while the group entity wants to
consolidate cash on a global basis. A number of
global banks operate overlay structures. These use
both physical and notional pooling techniques to
build a structure which allows the group entities to
maintain their existing bank relationships and to
pool balances to one location. The pooled funds are
then physically transferred to a different bank (the
overlay bank), which then consolidates balances on
a cross-border basis, often on a notional, or book
transfer, basis. This transfer to the overlay bank is
usually via a domestic transfer to the overlay bank’s
branch in each country, or to a partner bank (in
those locations where it does not have a branch).
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AFP GUIDE: Mobilizing Global Cash
DIAGRAM OF OVERLAY SOLUTION
TREASURY OVERLAY POOL
Overlay
account 1
ACCCOUNTS HELD WITH
OVERLAY BANK
Cash pool
master
account
Sub A
bank
account
Sub B
bank
account
Overlay
account 2
Cash pool
master
account
Sub C
bank
account
This diagram shows a core overlay structure. There
are two stages in an overlay structure. Cash is pooled,
either physically or notionally, at country level first.
Then each country pool is combined to the overlay
pool, again either physically or notionally.
This diagram shows how the physical and notional
pools illustrated earlier can be combined in an overlay
structure. On the left hand side, a physical cash
pool is used in country 1. On the right hand side, a
notional cash pool is used in country 2.
Once cash has been pooled in-country, the funds are
transferred to accounts held with the overlay bank.
NOTIONAL
CASH POOL
Memo
account
Sub X
Memo
account
Sub Y
Memo
account
Sub Z
Sub X
bank
account
Sub Y
bank
account
Sub Z
bank
account
>
Wherever possible, these overlay accounts are held
in the same country as the in-country cash pool, so
that this initial transfer is a less expensive, domestic
transfer. The overlay accounts are then pooled,
either notionally or physically as internal bank book
transactions.
MULTINATIONAL MANUFACTURING COMPANY
HEADQUARTERED IN EUROPE
Headquartered in Europe with operations in over
100 countries around the world, the company
decided to appoint a number of core banks to give
its subsidiaries access to local banking expertise.
At the same time, the treasury team wanted to
concentrate its cash back to its Swiss headquarters to
fund group entities wherever necessary. Because of
the number of different banks employed, the most
efficient way of concentrating cash is an overlay
structure. Wherever possible, the company operates
in-country zero-balancing physical cash pools. The
master accounts are then transferred to overlay
accounts held at one of the company’s core banks.
These overlay accounts are then zero-balanced to a
master account based in Switzerland.
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AFP GUIDE: Mobilizing Global Cash
How should different national banking
practices be incorporated?
One of the major challenges for any international
treasury practitioner is coping with the different
banking practices around the world. Despite
some efforts to standardize practices, there remain
significant differences in the payment formats used
around the world. Realistically, pooling is much
more effective if electronic payment formats are
used. However, to ensure straight-through processing
and to reduce the risk of error, payments need to be
prepared in a format suitable for processing through
domestic payment clearing systems. There are a
number of tools available to support treasurers to
prepare payment files in different formats. Treasury
workstations and some bank cash management
systems have the ability to prepare payment
instructions in a range of different formats. These can
be submitted to banks for onward processing in the
appropriate local systems.
Some companies operate payment factories or
payment consolidation programs, to prepare such
payment files at a central location. This structure
will allow the group as a whole to prepare payments
in local payment formats without having to employ
specialist staff in each operating entity. The payment
factory will have the ability to submit payment files
directly to the group’s bank or banks, which will
then be able to route these payments through the
appropriate local payment systems to minimize cost
and also risk of delay (and contract breach).
How should different regulatory
requirements be complied with?
Each country has its own regulatory requirements
which can prevent or add cost to pooling solutions.
The rules for the most common countries are
summarized at the end of this document. In terms
of operating a cash management structure within the
constraints of the different regulations around the
world, the key is to be open-minded and flexible. For
a cash management structure including more than
a small number of countries, it is highly unlikely
that a one-size-fits-all solution will work. In effect,
the structure may have to include variations of both
pooling techniques outlined above.
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Where should the header account(s) be
located?
Selecting the location of the header account (or
accounts, if more than one pool is operated) is a
key question. The most important factor is whether
pooling (physical or notional) is permitted at all. If
so, the treasury practitioner will have to establish
whether there are restrictions on resident and
non-resident bank accounts, and accounts held in
the name of different legal entities participating in
the same cash pool.
In theory, it is possible to operate a single global
cash pool under one header account, subject to any
constraints set by local regulation. However, just
because it is possible, this does not necessarily mean
it is desirable. A number of other key factors must
be considered before selecting the location of the
cash pool(s).
■■ Time
zones. While it is possible to have a single
cash position in a particular currency each
day, managing the pool can involve complex
authorization procedures. It is possible, for
instance, to manage cash pools on a handover basis.
For example, each day, practitioners in an Asian
regional treasury in Hong Kong will manage the
pool for the first few hours, before handing control
to a European team based in Brussels, which then
hands over to an American team based in San
Francisco, before the cycle starts again. While
this ensures cash is always being monitored, the
handover process needs to be managed carefully
to ensure clear lines of responsibility at all times
and with a clear audit trails. Moreover, such
structures risk overcomplicating what could be a
straightforward issue.
The decision regarding which
currencies to pool will also have an impact. For
example, if a decision is made to pool USD and
EUR-denominated accounts, it may be appropriate
to pool USD balances to the US, and EUR
balances to a header account in the eurozone.
However, tax treatment of repatriated profits may
make it more appropriate to pool both currencies
to offshore locations, to allow companies to invest
short-term cash in offshore investment instruments
>
■■ Currencies.
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AFP GUIDE: Mobilizing Global Cash
such as money market funds. On the other hand,
if a company has EUR borrowings, it would be
prudent to pool at least some funds to a location
from which repayment obligations can be easily
met. The same applies if many of the core suppliers
are based in the eurozone.
For less important currencies (in terms of
proportion of cash flows or surplus cash), the
company may choose to pool those in-country
until such time that it is worthwhile repatriating a
cash surplus to general operating requirements.
■■ Company
focus. Another variable is the structure
of the company itself. The largest multinational
corporations typically organize in one of two ways
– by function (production, distribution, sales, etc.),
and/or by location (EMEA, Americas, Asia-Pacific,
etc.). Depending on the degree of integration, this
structure may determine the underlying financial
structure and the degree to which treasury decisionmaking power is centralized.
However, the majority of organizations operating
globally will continue to generate a significant
proportion of their income and profits in their
home markets. It is not uncommon, for example,
for a North American company to have a North
American division and an international division. In
these circumstances, the North American division
will have a domestic focus and the international
division will have an international focus. Here,
domestic US regulation may well be the driver
for the company to try to impose control over the
non-US portion of the business, rather than any
intention to consolidate the international business
into the financial structure of the group as a whole.
US MULTINATIONAL IMPLEMENTS EURO CASH POOL
Historically, this US multinational concentrated
cash in USD and CAD, reflecting the origins of the
group. As the group expanded into Europe and then
Asia, it operated on a country by country basis, with
local finance managers repatriating funds to the US
central treasury on a discretionary basis.
As EUR-denominated sales grew, treasury decided
to implement a EUR-denominated cash pool to
This decision must always be taken in the context of
the organization’s objectives. If the core objective is to
strengthen control over cash, it may not be necessary
to pool globally at all. Regional or even in-country
pools will provide the organization with a clearer view
of positions across a group, and allow them to be
managed more effectively. Such an approach will still
offer the opportunity for in-country funding of group
entities where appropriate, and to invest any surplus
funds more efficiently.
allow a more efficient use of that cash. The company
decided to put in place a series of automated sweeps
of EUR balances to a header account in London,
held with one of the group’s core banks. Where a
local subsidiary does not use the core bank, bank
accounts are first pooled to a master account with
the subsidiary’s bank in that country, before the
balance is swept to London.
>
How many banks should an organization
use to pool cash?
Once the organization has determined its
objectives, the next step is to appoint the bank
(or banks) to work with. Unless the requirements
are straightforward, most organizations will run a
tendering process to appoint their banking partners.
This can be a useful exercise, as it will require
potential banking partners to provide details of how
they can best meet the organization’s objectives. Their
solutions to the problems will vary and be driven by
their particular strengths and networks.
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When considering new bank relationships (or
extending an existing one) at group level, the treasury
practitioner may be constrained by the degree of
autonomy that local entities have to open and
maintain their own bank relationships. Whatever the
relationship is, it is important to include the local
entities in the decision-making process, to ensure
their requirements are understood and met, and to
help any implementation go as smoothly as possible.
Unless the organization operates in a small number
of countries which all happen to be serviced by a
single bank with networks in each one, it will not be
possible for most operating companies to be serviced
by the same bank. Their daily banking requirements
will vary. Many operating companies will need
access to a local branch, although increasingly
this access requirement has been reduced via the
use of electronic banking techniques and via the
outsourcing of, for example, the collection of
notes and coin to specialist organizations. It must
be recognized, too, that some countries require
operating companies to open bank accounts with
local banks for specific purposes such as paying tax or
to receive repatriated profits from abroad.
Any change to existing cash management practices
may have an impact on relationships between
operating companies and their local banks. Without
a global approach, an operating company may invest
any cash surpluses locally. If the operating company
participates in a wider structure, such cash surpluses
may be pooled to the center, losing revenue for
the local relationship bank. It is also important to
consider other factors which may have implications
for the operating company as a result of participation
in a group cash pooling scheme.
■■ Access
to local funding. One of the benefits of
in-country bank relationships is that group entities
may arrange their own credit lines. While this
is likely to be more expensive than raising funds
centrally (group headquarters generally enjoy higher
credit ratings), it does diversify the source of funds
for the group as a whole. Treasury practitioners will
want to consider whether this loss of diversity will
be outweighed by the opportunity to arrange lowercost funding.
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■■ Relative
competence of banking partners. In most
cases, the local banking partners will have been
chosen because of their branch network, access to
local payment systems, and the ancillary services
they can provide. Before replacing the local partner,
the group and the local partner will need to establish
that they can receive a similar level of service from
any new banking partners. Bear in mind that this
evaluation should cover all the services provided
by the local banking partners, not just those
associated with cash management. For example,
a local bank may provide a subsidized service for
coin collection or for processing letters of credit,
because the operating company keeps a proportion
of its surplus cash in local investment instruments.
The withdrawal of some business by the local
entity may result in the local bank charging higher
(non-subsidized) fees for the remaining tasks. In
some cases, the local bank may even withdraw those
services as a result of the change.
■■ Sometimes
change is not possible. In many cases,
the local entity may need to maintain some form of
domestic bank account. This is likely to apply when
the local jurisdiction applies exchange controls,
which make the free movement of cash in and out
of the country difficult where an underlying trade
is absent.
>
How does a global approach to cash
mobilization alter the risk profile?
When considering whether to implement a global
cash management structure, treasury practitioners
should also consider the impact on risk faced by
the group as a whole and by participating group
entities. It is worthwhile reassessing potential benefits
of any structure to ensure that any gains are fully
understood and not overestimated. As an example, a
decentralized approach may be inefficient in terms of
the overall cost of borrowing for a group which is in
net debt. By adopting a global approach, a company
may lose the benefit of funding diversification
available through a presence in a number of local
markets. A loss of investment diversification is a risk
for a cash-rich organization.
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How can a new structure be made
future-proof?
One of the key risks for any treasury activity is that a
structure becomes inefficient over time. Because a new
global approach to cash can take significant time and
cost, treasury practitioners will want to try to avoid a
situation where a new structure is not used efficiently
after an anticipated event or lacks the flexibility to
respond effectively to an unexpected event.
There are three main areas where events can affect the
long-term efficiency of a structure:
■■ Company
change. The first objective is to ensure
that any cash management structure can be
adjusted to meet the future cash management
requirements of the company. This may include
adding additional entities in existing locations
via acquisitions, additional entities in other
locations, or expanding the structure to incorporate
additional currencies. Just because the structure is
optimal for current use does not mean it will be
optimal for future use. It may be appropriate to
implement an efficient structure which meets most
of the group’s objectives, knowing it has sufficient
flexibility to incorporate change, over a solution
which is currently optimal but may be difficult to
change. The risk is that future change may only
be possible via the introduction of an inefficient
bolt-on solution which requires different processes
or systems to be used.
■■ Regulatory
change. Regulatory change always has
the potential to alter the efficiency or, in some cases,
the legality of cash management structures. The first
way to protect against this risk is to ensure that the
primary objective of any structure is not to reduce
the tax bill. While a tax reduction will be welcome,
global cash management structures should always
be viewed as tools to manage liquidity and risk, in
the first instance.
There are two main regulatory threats to global cash
management structures in the current environment:
■■ Changes
to banking regulations. The ongoing
uncertainty over the financial strength of a
number of banks in various locations continues
to drive regulators to consider changing bank
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regulations. This could affect the viability of cash
management structures in two ways. Firstly, it is
possible that banks may no longer be permitted
or prepared to offer notional pooling solutions,
if regulators tighten rules covering the offsetting
of credit and debit balances. This could have
repercussions for locations where notional
pooling remains permitted. Cross-border
notional pooling may become even rarer in the
future. Much depends on the way central banks,
regulators and governments decide to strengthen
their domestic banking markets. Secondly, in
some countries, there is a continued pressure to
reduce the size of banks themselves. This is most
likely to affect those larger banks which can offer
a wider range of services to both institutional
and retail clients. This may result in some banks
withdrawing from the provision of cash pooling
services, or an increase in fees for transmission
services, as the opportunity for the crosssubsidization of bank relationships reduces.
■■ More
restrictive exchange controls. Recent
years have seen a gradual relaxation of exchange
controls throughout the world. This has had
the effect of increasing participation in global
cash management structures, along with the
expectation that further relaxations are likely.
However, the global economy’s current problems
show no signs of disappearing any time soon, and
their effects continue to impact on some countries
more than others. As these countries’ economies
come under pressure, there may be political and
other pressure to reintroduce some forms of
exchange control, whether overtly or in the form
of hidden costs (such as changes in reporting
or documentation requirements). Any such
reintroduction of exchange controls will make the
global mobilization of cash more difficult.
There are a number of examples where public
policy changes (whether or not as a result of
a change of government) have resulted in the
imposition of additional rules which have made
the repatriation of cash more difficult. For
example, Venezuela’s exchange controls have been
tightened since their initial imposition in 2003.
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■■ Market
events. Finally, unforeseen market events
always have the potential to reduce the effectiveness
of a cash management structure. In terms of risks to
cash management structures, these include:
country (and processing expensive cross-border
payments) and opening bank accounts in all the
countries in which they do business (which added
operational cost).
■■ Bank
The introduction of the euro was part of the plan
to develop this single payments area, although a
number of EU member states have not adopted
it, including Denmark, Sweden and the UK. As
part of this process, some pan-European payment
clearing systems were introduced. The TARGET2
system allows for the transfer of interbank funds,
and was intended primarily to support the execution
of monetary policy within the eurozone. The EBA
Clearing’s STEP2 system is the most prominent of
a small number of European cross-border payment
systems for retail payments. More recently, the
introduction of SEPA payment instruments for credit
transfers, direct debits and card payments has allowed
companies to initiate payments from one bank
account that are addressable to other bank accounts
within the SEPA area, and which are considered
to be domestic payments. (Checks remain purely
domestic instruments and are not covered by SEPA
rules.) Banks within the EU have to accept SEPA
instruments, although full functionality is required
only by February 2014.
failure. Any bank failure will have an
impact on the cash management structure itself.
It is not uncommon for individual banks to have
processing issues affecting the ability of their
computer systems to process instructions. In
extreme cases, the collapse of a bank will result
in major problems for many of its customers.
As institutional clients, companies typically
do not enjoy the same degree of protection as
retail customers. Consequently, some companies
operate with more than one banking partner,
as part of a business continuity plan. Any such
approach will reduce the potential effectiveness of
a single cash management structure.
■■ Exchange
rate movements. Any cross-currency
cash management structure will be exposed to the
effect of exchange rate movements. Companies
will need to consider the degree to which they
should protect themselves against that risk.
Some choose to operate single currency cash
management structures primarily because it
is easier from a regulatory and record-keeping
standpoint. However, such an approach also
allows foreign exchange risk to be managed
at group level through the use of aggregated
balances. Multicurrency cash pools can make it
more difficult to identify and therefore manage
any foreign currency risk.
What are the risks of managing cash in the
eurozone?
The introduction of the Single European Payments
Area (SEPA) is part of the European Union’s plan
to transform the EU into a single domestic market.
The EU has devoted significant resources to ensuring
the free movement of goods, labor and capital
throughout its member states. However, until the
introduction of SEPA, companies trading within
the EU still had to manage cross-border payments.
This meant they faced the same problem of choosing
between operating bank accounts from their home
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>
Over time, SEPA could allow companies to manage
EUR-denominated payments and collections
from a single bank account within the EU. If so,
the elimination of duplicate bank accounts will
automatically eliminate the requirement for complex
cash management structures in the countries covered.
However, companies may need to maintain a local
banking presence in different countries for a variety of
reasons: for example, a company receiving a significant
number of check payments in some locations (such as
France) may decide to maintain a bank account there.
Treasury practitioners with responsibilities for activity
in the eurozone do need to plan how best to take
advantage of SEPA. This includes making decisions
on which bank accounts the organization needs, and
when to make the changes.
The other major issue for treasurers is the impact
of uncertainty within the eurozone. There has been
some discussion for some time about the possibility of
©2012 Association for Financial Professionals, Inc. All Rights Reserved
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AFP GUIDE: Mobilizing Global Cash
one or more countries leaving the eurozone. Prudent
treasury professionals should have a contingency
plan, in the event that one or more countries do so.
It is impossible to predict with certainty whether this
will take place or, if it does, which countries would
leave. If such an event does take place, it is likely to
be effected quickly. For example, work may be done
over a long weekend, with banks in affected countries
not opening on the Monday. Short-term exchange
controls would be likely in such circumstances,
making it difficult to move cash on a cross-border
basis. There will also be a foreign exchange impact, as
cash balances may change in value relative to external
currencies (such as the USD), as the market tries to
establish the value of any new currencies as well as
that of the EUR (if it remains).
>
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AFP GUIDE: Mobilizing Global Cash
Conclusion – Identifying Best
Practice
It is important to state first that there is no single
ideal best practice for mobilizing global cash, from
a structural perspective. It is crucial for treasury
practitioners to keep an open mind and to focus on
their core objectives from cash management.
Set clear objectives
Understanding the purpose of any cash management
structure is central to its effectiveness. Setting clear
objectives will help to determine the requirements of
any project, and the detail of any request for proposal
sent to banks.
The project should be viewed primarily in
operational terms. The following questions can help
to define the objectives:
■■ How
will the project make the treasury operation
more efficient? How can this be assessed?
■■ What
is the desired net impact on operating
costs? This should set the costs of implementing
any new structure (investment in technology,
management time, legal costs) against the benefits
of implementation (reduced personnel costs,
lower transaction fees). This cost benefit analysis
should also be set against the costs of continuing
to operate as before. Bear in mind that there are
other non-monetized benefits and costs which
can be included in this assessment – notably any
improvement in the management of risk.
■■ How
will central treasury support local operating
entities? If an in-house bank or other more
centralized structure is adopted, this will require
central treasury to perform services on behalf
of the local entities. If decision-making is more
decentralized, how can a new structure improve the
efficiency of treasury operations in the local entities?
■■ To
what extent should cash be pooled? At what
stage is it no longer worthwhile to try to incorporate
entities into a structure? It may be just as beneficial
for the group to consolidate some bank accounts
on an in-country basis, given regulatory or other
restrictions. A compromise may need to be made
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between the ideal of a single cash mobilization
process, and the effort required to achieve that.
■■ If
a decision is made to pool cash, what is the best
location(s) for the header account? Why has that
location(s) been chosen?
■■ How
will the new structure help central treasury to
identify cash positions and manage risk? How will
the group manage risk in locations which have to
remain outside the structure? Are any other changes
needed to support the structure? For example, will a
treasury department need to improve its forecasting
system to take full advantage of the opportunity to
reduce external borrowing?
■■ How
will a new structure affect the risks faced by
the organization? The structure should provide
better visibility over cash positions and a greater
understanding of foreign exchange positions,
for example. However, it may also introduce a
concentration risk in terms of cash management
activity or funding. When setting the objectives for
a cash mobilization structure, these additional or
new risks should be identified and considered.
Answering these questions will help the treasury
team to establish their objectives from a cash
mobilization structure.
>
Identify available solutions
Once cash management objectives have been set, the
next step is to identify what is possible. There are a
number of constraints. These include the nature of the
cash flows within the business and with suppliers and
customers, the locations in which and between which
these cash flows occur, the applicable regulations, and
available infrastructure in those locations.
While it is good practice to establish preferences
when trying to identify available solutions, any
request for proposals from banks should always ask
for their ideas. Although their responses will tend to
focus on their own strengths, they may also include
suggestions which can be incorporated into the
preferred solution. Treasury technology providers
are also a good source of ideas, especially in terms of
implementation and execution issues associated with,
for example, cross-border capabilities.
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AFP GUIDE: Mobilizing Global Cash
Assess available solutions against
objectives
The final stage in the process of designing a new cash
mobilization structure (or reviewing an existing one)
is to assess all possible solutions against the group’s
original objectives.
Treasury practitioners should bear in mind the
following considerations to maximize the chances of a
successful project:
■■ Can
a single bank offer the range of services
required in the locations the company needs it to
do so? If not, what is the best way to structure bank
relationships?
■■ Work
with banks and other partners to develop
a clear structure within the regulatory and
infrastructure constraints already identified.
■■ Take
legal and tax advice to ensure a correct
interpretation of those regulatory constraints has
been made.
■■ Take
references from preferred banks’ clients to
ensure the bank can deliver what it promises.
■■ If
a bank is developing a new service to meet
particular requirements, be clear on the level of
expectation from the project, and agree these with
the bank.
■■ Discuss
project objectives with existing technology
providers to ensure there is sufficient capability
both to meet current requirements and to retain
flexibility into the future.
■■ Establish
whether any new technology is required.
Although a new technology project may add
time and cost to the process of redesigning a cash
management structure, it may more cost-effective
in the long term.
■■ How
will the treasury and operating companies
interact with the bank (or banks)?
■■ Work
with local operating entities to ensure their
requirements are fully incorporated into the new
structure, and to help with its implementation and
ongoing operation.
■■ Make
sure that the project has clearly defined limits
in terms of the scope to incorporate entities, given
local requirements. Ultimately, it may be preferable
to have a six-month project which incorporates
80% of the group entities, than an ongoing project
seeking to incorporate all.
Consideration of these matters should help to ensure
an appropriate and cost-effective solution is chosen
which meets the group’s objectives.
>
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AFP GUIDE: Mobilizing Global Cash
Appendix – Cash Pooling
Availability Internationally
The following table is a brief indication of the
availability of the two main types of cash pooling
techniques in 32 different countries. The table
indicates whether physical and notional pooling is
available in each country and whether cross-border
structures are permitted.
This table provides only a headline view of the
availability of the different techniques. A number
The information is taken from the AFP Country
Profiles. Further information on the availability of the
techniques, as well as tax rules and other payments
and liquidity management information, is available at
www.afponline.org/countryprofiles/
Comments
Pooling is available on a domestic basis, but
it is subject to a 0.6% financial transactions
tax. Salary payments and transfers between
accounts with the same tax identification
number are exempt from this tax, providing
limited scope for cash concentration within
single entities.
Not permitted.
Special collection accounts (cuenta
recaudadora) are used to consolidate
nationwide customer payments into
a single account.
Available on domestic and cross-border
basis.
Available on an in-country
basis. It is not generally
practiced on a crossborder basis.
It is possible to include resident and
non-resident accounts, as well as
accounts from different legal entities,
within the same structure.
Chile
Canada
Brazil
Belgium
Argentina
Notional Pooling
Australia
Physical Pooling
of different factors can affect the availability and
cost-effectiveness of the techniques, including the
selection of the location for the header account for a
cross-border structure. It is always important to take
appropriate tax and legal advice before establishing or
changing a cash mobilization structure.
Available on domestic and cross-border
basis.
Cross-currency cash concentration is
available.
Available on a domestic basis. Local
firms may establish cross-border cash
concentration structures in which one multicurrency account acts as a header account,
but BRL-denominated accounts or domestic
bank accounts may not be included.
Available.
Physical cross-border sweeping with USA
common. Pools denominated in CAD and
USD.
Available on a single currency basis only.
Cross-border cash concentration is available.
Available on domestic
and cross-border basis.
>
Each company that participates in
a structure must be treated as a
separate legal entity.
Both resident and non-resident bank
accounts can participate in the same
structure located in Belgium.
Not permitted.
Available for accounts
with the same beneficial
ownership.
A number of Canadian banks also
provide interest compensation
structures.
Not permitted.
The cuenta recaudadora is a special
collections account that enables
companies to receive all customer
payments in a single account.
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AFP GUIDE: Mobilizing Global Cash
China
Physical Pooling
Notional Pooling
Available to residents via entrustment
loans. Entrustment loan agreements require
regulatory approval.
Available to qualified non-residents on an
in-country basis.
Available. Cross-currency only to accounts in
the name of same legal entity.
Available, although it can
be difficult to arrange
cross-guarantees.
France
Available on domestic and cross-border
basis.
Available on domestic
and cross-border basis,
although it can be
difficult to arrange
cross-guarantees.
Germany
Available on domestic and cross-border
basis. Different legal entities and both
resident and non-resident bank accounts can
participate in the same structure.
Available but no legal
right of set-off, so
expensive.
Hong Kong
Available on a domestic and a cross-border
basis.
Available on domestic
and cross-border basis.
Different legal entities
and both resident and
non-resident bank
accounts can participate
in the same structure.
India
Available. Most cash is managed on a
domestic, single-entity basis. Multiple
legal entity pooling is subject to tax and
restrictions on intercompany loans. Crossborder pooling is restricted by exchange
controls.
Not permitted.
Ireland
Available on domestic and cross-border
basis.
Available on domestic
and cross-border basis.
Israel
Notional pooling is now
possible in China, both
in RMB and foreign
currency, domestically and
cross-border.
Available on domestic and cross-border
basis. Different legal entities and both
resident and non-resident bank accounts can
participate in the same structure.
Available on domestic
and cross-border basis.
Italy
Czech Republic
Some foreign currency cash concentration is
also permitted.
Comments
Available on domestic and cross-border
basis. Different legal entities and both
resident and non-resident bank accounts can
participate in the same structure.
Permitted, but rare.
Interest rate enhancement schemes
also used.
>
Accounts held by resident and
non-resident entities may participate
in the same liquidity management
structure.
Some banks provide domestic
multibank liquidity management
services.
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>
Physical Pooling
Notional Pooling
Available on domestic and cross-border
basis. Both resident and non-resident
bank accounts can participate in the same
structure.
Permitted, but rare.
Available for accounts held in the name of
the same legal entity.
Luxembourg
Some cross-border concentration is available,
but only in foreign currency.
Available on domestic and cross-border
basis.
Mexico
Korea, South
Japan
AFP GUIDE: Mobilizing Global Cash
Available. Cash concentration is permitted
for resident and non-resident accounts held
in both MXN and USD. It is possible but rare
to include accounts held by different legal
entities within the same group.
Not available.
Companies tend to hold multiple
collection accounts across several
local banks which allow customers
to make internal transfers through
their bank.
Available on domestic
and cross-border basis.
Different legal entities and both
resident and non-resident bank
accounts can participate in structures
based in Luxembourg.
Not permitted.
Netherlands
Available on domestic and cross-border
basis.
Poland
Available for accounts held in the name of
the same legal entity because of the impact
of stamp duty.
Available but expensive,
although it avoids stamp
duty.
Puerto Rico
Available on domestic
and cross-border basis.
Available. Resident and non-resident
accounts can participate in the same
structure.
Not available.
Interest rate enhancement schemes
are popular.
Cross-border concentration is permitted but
is not common.
Available in RUB only,
usually for accounts
held in name of same
legal entity. Cross-border
notional pooling is not
available.
Interest rate enhancement schemes
are available for resident and
non-resident accounts and on a
cross-currency basis.
Available on domestic and cross-border
basis.
Available on domestic
and cross-border basis.
Finance and Treasury Unit regime
established to attract regional
treasury centers to Singapore.
Available on domestic and cross-border
basis.
Not permitted.
Interest rate enhancement schemes
available, especially on a pan-Nordic
basis.
Russia
>
The group interest box scheme
applies a 5% tax rate on income
from interest payments between
companies belonging to the same
corporate group.
Singapore
Intercompany crossguarantees are not usually
required if participating
companies have the same
beneficial owners.
Cross-border pooling only within
NAFTA.
Sweden
Available in RUB only. Accounts held by
resident and non-resident entities may
participate in the same cash concentration
structure.
Comments
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>
Notional Pooling
Available on domestic and cross-border
basis. There is no distinction between
resident and non-resident bank accounts.
Available but expensive
because there is no legal
right of set-off.
Taiwan
Available on an in-country basis.
Only permitted between
accounts held in the
name of the same legal
entity with government
permission.
Turkey
Available on an in-country basis. Crosscurrency pooling is not permitted. Crossborder pooling is difficult because of
exchange controls.
Not available.
United Arab Emirates
Available on domestic and cross-border
basis. Both resident and non-resident bank
accounts and separate legal entities can
participate in the same structure.
Available on domestic
and cross-border basis.
United Kingdom
Available on domestic and cross-border
basis.
Available on domestic
and cross-border basis.
Different legal entities and both
resident and non-resident bank
accounts can participate in the same
structure.
United States of America
Available, primarily on a domestic basis.
Recently permitted. Not
common.
Physical cross-border sweeping
with Canada common. Pools
denominated in CAD and USD.
Available on an in-country basis to
resident entities for VEF only. Residents
may only participate in cross-border cash
concentration structures located outside
Venezuela.
Not permitted.
Exchange controls make cross-border
liquidity management difficult.
Switzerland
Physical Pooling
Venezuela
AFP GUIDE: Mobilizing Global Cash
Comments
Swiss and international companies
have established centralized treasury
operations in Switzerland under the
business coordination center regime,
a tax-efficient structure.
>
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>
About the Author
WWCP Limited
WWCP’s team of financial researchers, journalists
and authors provides its WorldWideCountryProfiles
service to a number of banks and financial
institutions and professional bodies. Purchasers use
the individual country profiles, which are researched
and written to their specification, for their customers
and prospects, sales literature, their intranet and
extranet sites and sales training. WWCP researches
over 190 countries.
WWCP researches, authors and publishes
authoritative Treasury Managers’ Handbooks for
Scandinavia/Nordic/Baltic countries; Central and
Eastern Europe; Europe (five editions); Africa; the
Americas (four editions); and a Global Treasury CD
covering 98 countries (three editions). Publications
also include a number of definitive treasury
guides: Best Practice and Terminology; with The
ACT, Investing Cash Globally (three editions),
International Cash Management and Trade Finance;
and, with AFP, Treasury Technology and this Global
Liquidity Guide Series.
>
www.treasurybestpractice.com
www.worldwidecountryprofiles.com
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ABOUT THE ASSOCIATION FOR FINANCIAL PROFESSIONALS®
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